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 Rev. Rul. 75-20

1975-1 C.B. 29

Section 62 -- Adjusted Gross Income

IRS Headnote

Forfeiture of interest on premature withdrawal from a time savings account; deductibility. A series of questions and answers explain how to claim a deduction, in arriving at adjusted gross income, for interest forfeited as a result of premature withdrawal of funds from a time savings account and the refund procedure for a taxpayer who forfeited such interest in 1973 and was not permitted the deduction.

Full Text

Rev. Rul. 75-20 [fn1]

Various questions have been raised concerning the procedure to be used in deducting the amount of interest included in income but forfeited as a penalty for premature withdrawal of funds by a depositor of a time savings account.

Section 62 of the Internal Revenue Code of 1954, as amended by Pub. L. 93-483, section 6, 93rd Cong., 2nd Sess. (Oct. 26, 1974), provides, in general, that the deduction allowed by section 165, for amounts forfeited to a bank, mutual savings bank, savings and loan association, building and loan association, cooperative bank or homestead association as a penalty for the premature withdrawal of funds from a time savings account, certificate of deposit, or similar class of deposit is allowable in arriving at adjusted gross income for taxable years beginning after December 31, 1972.

Question No. 1. How may a taxpayer determine the amount deductible, if any, of interest forfeited from the premature withdrawal of a time savings account?

Answer. In most cases the financial institution will indicate the amount of deduction allowable on Form 1099-INT, Statement for Recipients of Interest Income, along with the amount of interest income to be reported. However, if a taxpayer is not furnished the amount of deduction allowable, the financial institution with whom the taxpayer had the time savings account should be contacted in order to ascertain the information necessary to determine the deduction.

Question No. 2. May a taxpayer file a Short Form 1040A, U.S. Individual Income Tax Return, and deduct the interest forfeited because of a premature withdrawal of a time savings account?

Answer. A taxpayer may not file a Short Form 1040A and deduct the interest forfeited because of a premature withdrawal of a time savings account. Form 1040, U.S. Individual Income Tax Return, must be filed.

Question No. 3. If a taxpayer incurs a deductible loss due to interest forfeited because of a premature withdrawal of a time savings account in 1974, where on Form 1040 may he take the deduction?

Answer. For 1974 the deduction for the interest forfeited because of a premature withdrawal of a time savings account should be entered between the entry spaces for lines 38 and 39 by writing "forfeited interest penalty" to the left of the entry and including the amount of the penalty in the total for line 43.

Question No. 4. How should a taxpayer, who incurred but did not claim a deduction for 1973 of interest forfeiture from the premature withdrawal of a time savings account because the standard deduction was taken, amend his 1973 return to claim the deduction of interest forfeiture?

Answer. The taxpayer should file a claim for refund using either Form 1040X, Amended U.S. Individual Income Tax Return, or Form 843, Claim.

[fn1] Also released as TIR-1322, dated Dec. 26, 1974.